Researchers Examine Credit Profiles: Today vs. Pre-Crisis

October 8, 2013

Researchers Examine Credit Profiles: Today vs. Pre-Crisis

10/08/2013 By: Krista Franks Brock

Mortgage lending remains tight compared to historical norms, and lending could tighten even further as the government takes steps to lessen its role in the market, according to a recent report by Moody’s Analytics and the Urban Institute.

While the report concedes “underwriting does not appear overly tight in terms of debt-to-income or loan-to-value ratios,” the report’s authors said the credit scores required to obtain a mortgage loan today are abnormally high.

Not only is the average credit score of a GSE-backed loan today about 50 points higher than that of a GSE loan pre-crisis, but also the researchers pointed out, “Households with high scores today earned them during a tough economic period with high unemployment, weak stock prices, and declining house values.”

“In contrast, households had a much easier time obtaining high credit scores in the late 1990s and the early 2000s,” they said.

On the other hand, current debt-to-income ratios average between 35 and 45 percent, just slightly higher than the 30 percent average of pre-crisis days, according to the report.

Loan-to-value ratios today average between 85 and 90 percent, again just slightly higher than pre-crisis average of 75 to 80 percent.

Looking ahead, the researchers say, “Some impending moves by Fannie and Freddie and possibly the FHA will tighten the credit box further.”

For example, the GSEs are increasing their down payment requirement from 3 percent to 5 percent and reducing the loan amounts they will accept. The Federal Housing Administration (FHA) is likely take similar measures, according to the report.

“Reducing Fannie and Freddie’s outsize role in the mortgage market is ultimately desirable, but will significantly tighten the credit box and impair the housing and economic recoveries if private mortgage lenders are not able to fill the void when that contraction occurs,” the report said.

“[I]t will clearly be important for policymakers to ensure that as they curb government lending they shrink its market share, not the size of the market,” the analysts stated.